Weinstein, Green, Fallon and British Pound Outlook: Analysts see the Links, Warns on Potential Sterling Downside vs. Euro and US Dollar as a Result
Above: Damian Green, Member of Parliament for Ashford (C) damiangreen.co.uk
Yes, you read correctly, Hervey Weinstein and the Pound are now linked. This sounds like a weak relationship dreamed up by traffic-thirsty tabloids, but the argument is looking somewhat convincing and we believe we should flag the issue to investors.
The linkage between Weinstein and the Pound comes via the brewing Westminster sexual harassment saga and the potentially destabilising impact it will have on Theresa May’s Government.
The argument is that Weinstein's alleged misconduct has rightly shone a light on the issue of sexual harassment and the gaze has now turned to the UK political classes.
“The fallout from the Harvey Weinstein sexual harassment scandal has gone global and has now spread to the corridors of Westminster with a number of accusations being made public in recent days. If you are reading this from beyond the shores of the UK you may already know the names of up to 40 MPs who have been accused of inappropriate behaviour,” says Derek Halpenny, European Head of Global Markets Research at MUFG.
The first casualty of the growing scandal is Defence Secretary Michael Fallon who resigned his post on November 1.
“GBP/USD also slipped following the resignation of Defence Secretary Fallon and despite the better than expected October UK manufacturing PMI,” says Emmanuel Ng, analyst with OCBC Bank in Singapore.
Analysts see fresh instability in an already unstable UK administration, which spells for potential uncertainty going forward.
Also on November 1, reports confirm the UK Prime Minister's lieutenant Damian Green is being investigated for brushing a Conservative Party activist’s knee and sending her suggestive text messages.
Looking at the list of allegations made against various Conservative polticians, and speficically the allegations levelled against Green, there is a risk the seriousness of sexual misconduct and abuse is diluted by a desire to equate clumsy sexual advances with the kind of offences committed by Weinstein, which are clearly more sinister and serious in nature.
Regardless, we should never underestimate the ability of the opponents of the Government to use every possible angle to topple them; and keep in mind this Government have been consistently shown to bend towards a perceived public mood as conveyed by media headlines.
“This could turn very serious for the UK government,” says Halpenny. “The Conservative-led government currently has a wafer-thin majority that requires the support of the DUP in Northern Ireland. Serious accusations against sitting MPs could result in expulsion from the party that further weakens PM May’s grip on power.”
In the past we have seen Sterling falter when the leadership of Theresa May is questioned because markets dislike uncertainty, and a fresh General Election would provide bucketloads of the stuff.
“The cabinet is now facing an additional challenge due to professional conduct allegations which could lead to a possible cabinet reshuffle. A potential by-election could weaken the Tory-DUP majority further,” says Hans W. Redeker, Strategist with Morgan Stanley in London.
Halpenny warns the sexual harassment saga therefore “has the potential to unsettle investors and weaken the Pound just as Brexit negotiations enter a crucial period ahead of the EU summit in December when it is hoped formal progress to transition negotiations can be announced.”
A new front in the Sterling debate has now been opened up.
At the time of writing the Pound-to-Euro exchange rate is seen trading at 1.1430, the Pound-to-Dollar exchange rate is quoted at 1.3296. Both pairs are near where they closed the previous day.
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Sterling Advances on the Back of Strong Manufacturing Data, Bank of England Eyed
The Pound rose against the Euro and US Dollar Wednesday after the latest IHS Markit data showed a surprise acceleration in UK manufacturing activity during the month of October.
October’s IHS Markit Manufacturing index rose to 56.3, up from 55.9 in September, when economists had forecast it to edge down by a fraction.
New order volumes remained solid during the month, aided by healthy levels of domestic demand and rising inflows of new export business, with UK firms seeing rising demand from customers in the USA, Europe, Australia and South America.
“UK manufacturing made an impressive start to the final quarter of 2017 as increased inflows of new work encouraged firms to ramp up production once again,” says Rob Dobson, a director at IHS Markit. “The sector looks to be achieving a quarterly rate of expansion close to 1%, therefore sustaining the solid pace of growth signalled by the official ONS estimate for the third quarter.”
Dobson says the continued robust health of manufacturing and rising price pressures will help cement expectations of the Bank of England hiking interest rates for the first time in a decade as Thursday’s announcement approaches.
The BoE is widely expected to raise the cash rate by 25 basis points to 0.50%, reversing the rate cut it announced in August 2016 but what matters for the Pound's outlook is what the Bank says about subsequent interest rate rises. Is this a one-off or the start of a soft cycle of rate rises?
If the Bank communicates the latter, then expect Sterling to hold recent gains and maybe extend them.
Based on the strength of the manufacturing figures from Markit the Bank would be justified in raising rates again in 2018 if we consider the strong hiring intentions mentioned in the report.
